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Motley Fool explores value of CU credit builder loans

ALEXANDRIA, Va. (7/15/14)--For as little as $50, consumers and credit union members can now purchase a better credit score, thanks to credit-building loan products that are becoming increasingly more popular at smaller financial institutions.

The personal investment website
The Motley Fool
posted an exploration of the loan product Sunday.

As explained by the site, credit-builder loans carry low-interest rates and are structured to help borrowers cultivate stronger credit history.

Consumers take out small dollar loans, between $500 and $2,500 for example, and the funds are then placed in a savings account or certificate of deposit.

The consumer then pays off the loan over the next six to 18 months in full, at which point the entire amount is given to the borrower, all for the cost of a few dollars in interest.

For the consumer, the process results in a head start on a savings goal, in addition to an improved credit score. But the financial institution benefits as well.

"Credit-builder loans are a (small) goldmine for banks,"
The Motley Fool
article's author Jordan Wathen said. "The loans carry absolutely no risk for (credit unions), since the loan proceeds are not disbursed to the customer until the loan is paid off."

When deciding whether to utilize the credit-building loan product, Wathen has several suggestions:

Take out a credit-building loan in the smallest amount possible, and borrow from a local credit union, which offer the lowest-cost loans. This option can help repair credit at the lowest cost; and

Consider alternatives such as a no-fee credit card that can also help build credit.